It’s 2016 and here’s a quick update of things from around the world. Leonardo Di Caprio won an Oscar, Donald Trump vs Hilary Clinton are rivals in the American Presidential Race, Credit Cards have taken over cash as a popular mode of money transactions and loans are available aplenty to help you in sticky financial situations. If you didn’t know any of this information, you are probably living under a rock in a galaxy far away.
Be it buying property, or casual shopping, or tackling a money crisis, different types of Loans and Credit Cards available in the market have made life easier for us. One thing which most borrowers dread is Loan or Credit Card rejection. In order to prevent rejection, one needs to understand the factors taken into consideration by banks before approving or rejecting a Loan or Credit Card application. Other than your income and job profile, banks closely scrutinise your credit report and Credit Score when it comes to a Loan or Credit Card application. A Credit Report is your month by month record of credit and payment history. A Credit Score is a number that reflects your credit history.
Additional Reading: Why Your Loan Might Be Refused!
Before jumping to how to avoid your application being rejected using your credit report and Credit Score, you need to understand the information that your Credit Score and credit report convey to the banks. Take a look at what a bank checks in a credit report:
- How many loans or Credit Cards you have.
- The total amount of credit you have availed.
- The ratio of Secured Loans to Unsecured Loans.
- Whether you pay your loan EMIs and Credit Card bills on time.
- If you have ever defaulted on a payment before.
- Your existing debt.
- If you can manage repayment of new credit based on your income and existing debt.
Taking all the above information into account, a bank approves or rejects a Loan or Credit Card application. Now that you know the importance of a credit report and Credit Score, it is essential to maintain positive information about your credit history in order to avoid rejection. A CIBIL Credit Score varies from 300 to 900 points. The closer your Credit Score is to 900, the higher are the chances of getting a Loan or a Credit Card with favourable terms.
Here are a few things you could do to improve your Credit Score and credit report which will, in turn, improve your chances of a Loan or Credit Card approval.
- Pay EMIs and bills on time: If you have a loan debt, make sure that you pay the monthly EMIs on time to avoid a default. Similarly, pay your Credit Card bill on or before the due date. Maintaining a no default record will have a positive impact on your credit report and Credit Score.
- Limit Credit Card usage: While it is great to swipe, shop and pay later using Credit Cards, one must be careful about overusing plastic money. The more you use your Credit Card, the higher your Credit Card bill will be. If you are unable to clear the balance on time, the burden of debt will increase and will have a negative impact on your Credit Score.
- Maintain a 30% or less Credit Utilisation Ratio: When using a Credit Card, make sure that you do not spend more than 30% of the allocated credit limit on your card as it will damage your Credit Score. The lower your Credit Utilisation Ratio, the healthier your Credit Score will be.
- Close existing debts: Before you apply for new credit, make sure that you have cleared some of your existing debts. A high credit exposure (i.e. a large amount of debt) reflects in your Credit Report and it can make banks hesitant while offering you new credit.
- Maintain the right mix of debt: Make sure that the percentage of secured debt (Home Loan, Car Loan, etc.) is higher than the percentage of unsecured debt (Personal Loan, Credit Card).
Additional Reading: Top 10 Reasons For Credit Card Application Rejection
Once you have mastered the art of maintaining a good credit report and Credit Score, loans and Credit Card approval will become easier and less painful.
Need to check your eligibility for a Loan or a Credit Card?